Why Cash Flow Shouldn’t Be Your First Priority in Rental Property Investing

Jeff Loiacono (00:00)
so most people who are getting into this is probably in their 30s, maybe they’re in their 40s, they have a job. So your job is what you’re using your money to live on. You’re building a portfolio for your future retirement, for your kids. And so you don’t really need the cashflow. You want to parlay the cashflow to get as many properties as fast as you can, because properties, as we know in the history, they just go up. you know, and everybody says the best time to buy real estate was, it’s five years ago, no matter what.

Michelle Tack (02:01)
Welcome to the podcast, Jeff, for those that are joining. I’d like to start out with one of the things that really impressed me, one of your strengths that we talked about a little bit before is your real understanding of how to purchase properties that get into your deal box that have the right attributes.

And to do currently, my understanding is have 33 properties under your belt and that you’re doing primarily rentals for. But you sound like you have it really down to a science. For those that may be not familiar with your world, can you give us a short version of what you’re making focused these days?

Jeff Loiacono (02:48)
Okay, so my main focus is to acquire real estate and to basically die with the real estate. So to buy, defer the taxes and just build a real big pile of wealth. And basically what I look for is I look for properties in any current market that’s a good deal. And there’s just a couple of other factors I look at. I look mostly for forced appreciation and look for the tax write-off. So for instance, if I could find a house that I could force that

you know, 10 to 20 percent and I’m going to take a $50,000 write-off because I’m doing a renovation and it’s even if it’s going to break even in the cash flow, I’m okay with that because the next year I raise rent every year. Every year I raise rent. So that’s my main goal is to find deals like that and I do it different ways. You know, the market has changed for the last, you know, seven, eight years I’ve been doing this. So when the rates changed, I had to, you know, I had to change my strategy a little bit.

Michelle Tack (03:48)
Yeah, I mean, what really impressed me when we spoke is that when you talked immediately about the four things or maybe the five that you look in a deal, you said that cash flow was the least important to you. you explain why? Again, you sort of touched on that just now, but can you explain that a little bit?

Jeff Loiacono (04:04)
I mean, all right,

so most people who are getting into this is probably in their 30s, maybe they’re in their 40s, they have a job. So your job is what you’re using your money to live on. You’re building a portfolio for your future retirement, for your kids. And so you don’t really need the cashflow. You want to parlay the cashflow to get as many properties as fast as you can, because properties, as we know in the history, they just go up. you know, and everybody says the best time to buy real estate was, it’s five years ago, no matter what.

part of the time to look at. There’s a couple of peaks in the market where it’s gone down. To me, you just buy a good deal in the season you’re in. That’s all you can control. You can’t control if goes up or down. You just got to be able to hold on through it through the currents and the tides that come in with real estate and the downfalls with tenant evictions and stuff like that. But that’s not hard if you just allocate some money, extra money when you’re underwriting your deals.

So I’d say

for me of the five things or five, everybody looks at cash flow. I don’t because you everybody has a job or their spouse has a job to help pay their what’s called. I look for the what I was saying earlier the forced appreciation and I look at the tax write-offs because since I’m a real estate professional all the taxes up flow to any other business including my wife’s income to take our taxable income down. So whatever I buy I’m writing off towards that saving those money.

taxes. So that’s my two things I look for. I’m forcing equity. I could talk about a most recent deal, but I did. It was pretty much was a home run deal. I bought this house from an investor friend of mine. Her dad was moving. She knew I bought houses. And so she calls me up and I say, hey, listen, I could give you 240,000 for this house. I bought it for 240,000. It was a three bedroom, two bath. And it was, was different than what my buy boxes normally. Normally I buy three, two bath, 12 to 15.

I do a light renovation and I rent them out between 22 and 2500 bucks. This one was a three bedroom two bath that was 2400 square feet and it was actually back in this 1979. It was actually the model home and when they have model homes when you look in the neighborhood of a model home, the model home never has a garage. They turn it to an office and when they sell the model home, they convert office back into a garage. This specifically when you bought the model home, he I don’t want a garage.

didn’t have a garage and had drivers. So it got that extra 400 square feet that was on the tax records. So what I did is I said, hey, I can make two more bedrooms in this and still keep it nice. So I converted it. I spent about $35,000 doing the renovation and making two bedrooms. And the market rent as a three bedroom was around 23, 2,400. My mortgage with 20 % down, PITI with a 7.125 % interest rate,

So it cashflow as a three bedroom two bath, making it as a five bedroom two bath, which is very weird. You you know, when does a five two, I’m getting $3,100 a month like that. So I’m cash. It was a killer in the cashflow, which is not what I look for, but I took $53,000 off on my tax write offs from that one purchase. That was big. I forced the equity. I’m in it. So 240, I’m in it about 275. It’s worked about 335. So I forced

about 60k equity, the cash flows, you know, 1200 bucks a month. I mean, it’s sort of a whole deal. You know, it just this last recent deal. So those are the kind of deals I look for. But I would have bought that deal if it broke even. If the cash flow was even on that, because of the 53,000, I would have took off on taxes. the 60k in equity, I bought that I’d buy that if I’d made zero cash flow if I broke even, I might even buy that if I lost $100 a month or $200 a month, because I would just catch up with the breaking even I

just allocated a little more money because I’m taking such a huge hit. ⁓ What’s called those first two parts. that’s her to me, which other people will say, well, I got to make X money on my cash to me. I mean, I’m in it for the long haul. I’m just going to keep raising rent and in five, six years, they’ll keep coming up. So that’s just the most recent deal I’ve done, you know, back in.

Michelle Tack (09:12)
That’s

a great example. I have a question for you. When we talked earlier, you had said, you know, people think that you’re not working that hard, but you’ve got the machine running smoothly from your operational piece. Can you talk to folks that can learn from you as to what you’re doing to, because you’ve got 33 properties. That’s a lot to keep operationally efficient.

Jeff Loiacono (10:13)
Yeah, you know, and I’ve learned from every investor, from the new investor to different business guys. I talked to everybody. I never look at someone because you have one property or a new, because I might get a nugget because you look at a different point of view on something that I could add that to my business. So I have a lot of different systems in place. I’ve learned from other investors or just, you know, different businesses that I go, well, I could use that towards my business. I’d say when you first start off, the things that you absolutely need is you need a good real estate attorney. You need a good

contractor, you need a realtor that you could trust, you need a good title guy. I’d say you need those four or you know you could have there’s probably 50 people you need but I’d say you start off with those four. I mean I could go down the list from architect, foundation guy, engineer, electrician, plumber, HVC, landscaper, you know you could go down the line because you know when a tenant turns over you got to have someone mow the lawn or else the same thing notices. So you need you need every single person you could probably write it down just

you know, just it’s probably 50 plus people or something. Those are the ones I say you need and you got to get people you trust and you got to probably have eventually a couple of each. know, the one goes, you know, you don’t have to be so it’s probably good to rotate people when you need a good house cleaner, ⁓ good handyman. ⁓ And, know, once you have those people on your team and make sure you’re, you know, I could, I’ve done houses from when I was on vacation in Japan, I’ve got a house done. I’ve done when I was on a ship on a cruise.

I got a house done. I had a client, you know, was representing her as a realtor buying a house and I was in Japan. I bought houses. I’m a poker player, my poker player. ⁓ really? cool. I go to Vegas for the World Series of Poker and I’ve had the notary come to the downstairs casino to sign documents to buy properties. Yeah, that’s awesome. That’s awesome. You really could do it remotely. I started off as a remote investor. Originally I’m from California. I flew out to Texas because of all the companies moving here back

in 2015 and yeah, I started to do that. But you definitely got to get, you know, some people are more about finding the properties than the deals. I would recommend this. If you decide you want to invest in a market and you think the numbers work, I wouldn’t look for a property first. I would look for those people first. would look for the, cause you get- Yeah, that’s the first step. if you told me, hey, I want to buy properties of Memphis, you know, I have two rules to me deciding the remote investment in Memphis.

and they have nothing to do with the numbers. There’s two things, and people cry, laugh about, but this is sort of me.

Is there a direct flight that’s cost effective from where I currently live? That’s one. And do I enjoy going there? Because if you going there, it’s going to be a headache when you do. I went to look at an apartment in Cincinnati once and I didn’t enjoy it. The flight was horrible. It was a good deal. I didn’t buy it. So those were my two rules of investing. When I first started coming to Dallas, it didn’t feel like work because I love coming here and I eventually moved here.

Michelle Tack (13:09)
Thanks.

Jeff Loiacono (13:18)
you live in an area that real estate doesn’t work, the numbers doesn’t work just because of how it is in that certain market for what you’re trying to do, and you go to a different market where it would, I would make sure they have those two things. And I would look at properties and understand the numbers and you’re okay, these things that make sense. Well, everybody is looking for a deal and the problem is you’re just gonna scramble. So if you’re gonna scramble and you’re gonna learn, the best part to do is to partner with people with cash and learn while you’re not getting penalized by hard money fees.

everybody gets a hard money lender, they get all these fees and they just get, they get roped into the deal because time is not on your side because you have no experience. They get hosed by a couple of contractors and I know this because it’s happened to me. I’ve been through it all. I went through the mud and seen every scenario you could think

Michelle Tack (14:06)
except I imagine you have.

Jeff Loiacono (14:09)
So I know what to look for. so for me, if I was going, what I would do is I’d find ⁓ a comp of a realtor and say, this is pretty nice work. That means if this guy was flipping this house and the contractor that did it, when the buyer who bought that property got a home inspection, it passed the home inspection enough for them to buy the property. So he probably did pretty decent work. So I’m going to go after that realtor and say, Hey, I want to buy properties. Can I work with that contractor you work? And then I’m going to go meet him. And then I’m going to go look at his projects and I’m going to say, Hey,

What are you doing here? What’s the scope of work? He said, oh, this is going to take six weeks. It’s 50 grand. I’m going to come out there every week and a half and become friends with him and see how the project goes. Did he stay on time in six weeks? How did his work look? And then now I got my contractor. So that’s probably the hardest one to get is probably a good contractor. I’d say the next hardest part would be a real honest realtor, you know, because they’re on commission that someone’s going to really shoot you right and tell you, hey, you know, they’re going to tell you whatever it is that this house

resell for this. I say that’s the next but like there’s no point of buying a property if you don’t have a contractor. you basically the best advice I could give is go slow to go fast. Be patient.

Michelle Tack (15:22)
That’s really great. I have two more questions before we wrap up, maybe three. And so the next question I have is, you give an example of a recent event where, as you well know, because you’ve been doing this for period of time, not every deal is perfect. And sometimes it goes sideways, or some piece of it goes sideways. Can you give an example of maybe sharing one of those moments recently that it started moving that way, but you were able to pivot in what you did?

I’m sure folks would like to understand that.

Jeff Loiacono (16:38)
So recently, mean, this new project that I’m doing, it wasn’t really, I mean, it was a small payment, so I can’t really say there’s one, but basically when you do a DSCR loan for the people that know investor loan, very popular is called a DSCR loan. It’s a debt service cover ratio loan. And basically they don’t lend you money based on your tax returns. They lend you based on the asset and your experience and your credit score coming to factor which rate. So when you’re buying a

property that way is an investment property. They’ll lend you money based on the DSCR, what they call like the rates. Let’s say it’s a 1 % DSCR, which that means if your PITI, your Pinchful Interest Taxes Insurance is let’s say $3,000, they’re gonna also do a rent survey to see what the rental survey is in the area and it has to be at least $3,000. If it becomes less than $3,000, then they’re gonna

they’re going to hit you for a bigger down payment. And so I had a property that the PITI was 3,200. And they had the rent survey at 2,600. I said, you guys are wrong. Here’s proven rent. I gave them a list. And they said, nope, we’re not going to do it. You have to put 25 % down. And this is a house that I’m converting from a four-bedroom to six-bedroom. So I’m probably going to get somewhere in the neighborhood of 48 to 5,500. But they’re not going to lend their money based on that. They’re lending it based on what they think the rent survey is.

which they were still wrong. They should have had at 3,200. I fought them on it. And basically, they were not going to lend money unless I put 5 % more down. And I ultimately did. I put 5 % more down. had the money. wasn’t, it’s just, I’m a leverage guy. I want to be in the deals as little as possible so that can buy more deals.

Michelle Tack (18:25)
That’s great. Last two questions for you. What’s the next real goal for you in the next six months or a year?

Jeff Loiacono (18:32)
So I’m rolling out a couple of different things. One of my goals is to get one of my daughters up to speed to help with the businesses and assistant and just dive in and understand everything else. One of my goals is what I’m offering is where I manage a fund for investors. Where basically we create an entity that they’re the member, I’m only the manager, and I basically help them do my strategies for a tax advantage for them. So people who have a tax problem

and want to do what’s called cost segregation on some real estate deals. And they’re not worried about the cashflow. They just want to make sure they cover. And they’re just looking to acquire real estate for the long term and the tax write-offs. So that’s of my goals is probably I’m starting off with one guy in a small fund. And then eventually I will probably scale it to different funds for different guys. So that’s one of the things I’m doing. my goal was when I started this at 40,

I started, I bought my first property at 37 years old, my first rental property, not my first house. And most people think it’s too late. I bought my second property at 40 and I’m 45 years old and I got, well, 30, I think I have 30, I have 34 doors. have one that just closed for the time talking and I have one in escrow. So I’ll have 35 doors. My goal was a hundred by 50 and I don’t think I’ll get to that goal, but if I get close, I’ll still be okay. So.

Michelle Tack (20:00)
I think

that’s a good possibility, I think. So I appreciate you doing that. Lastly, before we close, can you talk about, you emphasize a lot about the contractors and those people and getting that started first. But in addition to that, are you part of any network or any group? Where do you put those relationships or that type of networking, building in terms of importance

⁓ overall to your business.

Jeff Loiacono (20:33)
So when I first started, went through the real estate seminar system, you know, like some people do, and there’s a lot of new people. Right. Not a bad way to network. I raised capital through those groups, a lot of capital. started with it. My one thing is I decided that I wanted to just do deals on my own because I didn’t want to really answer to people on situations. So I’d rather just with my own money or with one private money guy would be fine. Not multiple people piecing it together, but think the way to

start, do that and learn together. ⁓ For networking for me, it’s just natural with other business guys. ⁓ Not so people who are real estate investors. Some are everybody that I know that’s business, they own some form of real estate. You know, they might have one or two or three houses. They’re not really real estate investors. They just bought houses and just, you know, rent them out or whatever, just do themselves. They’re not really full time investors like myself. So I’ll network with those guys where I’ll tell them how I could do this for them or help them out.

or help them manage whatever small things do. As far as real estate investors, like big group, I don’t really go to much of the networking things just because, I mean, just me personally, it’s just more of a time thing for me. I’m not opposed to it, but when I’ve gone in it, most of those are trying to sell you something. I just, you know. Yeah, so that’s just me personally. Yeah. Well look, ⁓ I think what I’m afraid to do is, if you’re gonna do it, is you run the networking. Don’t go to someone else’s running.

network in one. You create your own because if you go to someone else, they’re usually trying to sell you some program and they really force the pressure on you to join whatever they’re trying to sell. And it’s not as organic to me to really just have a group of real estate investors new and seasoned who are talking about investing in real estate and learning from each other. It’s more about let’s sell them this product for me and so whoever’s running. So I think that’s the to do is you create your own and you have people show up to yours and then

Michelle Tack (22:05)
Thank you.

Jeff Loiacono (22:33)
you just network that way.

Michelle Tack (22:35)
Thank you, Jeff. We appreciate your time, your story. You’ve got a lot of detail there and it’s incredible what you’ve done in a short amount of time. For those that are listening to the podcast, thanks again to you to being here. You’ve got value from this. Please ensure that you subscribe with our service from real estate investors. Again, Jeff, thanks so much.